Future Fund

“When you ask people about the sharpest investors, Future Fund, Aussie Super, Uni Super down there, They're doing things that the Canadians are also doing.”

“So obviously we get base salaries, but we also have a bonus arrangement, which is linked to some extent to personal goals, which might be about the team or the individual responsibilities. Ah, and they're assessed by the managers, but the quantitative performa…”

“My job actually is much more about team structure and process and strategy and most importantly, culture than about making investment decisions.”

“And then secondly, we think about risk in terms of the cumulative drawdown over a three year rolling period, because we think as a public fund, we've got a responsibility to the public and to the taxpayer and the tolerance for bigger drawdowns over longer time…”

“Most funds, I would say, I might not like to think of it this way, but I would say they're quite backward looking in their portfolio construction. What I mean by that is they take this sort of cap M theory and their main variance optimization, and they look at…”

“Very wisely made the decision that it was better to build the back office and the custody system and the legal approach first before you start hiring investment people, because, believe it or not, investment people want to start investing straight away.”

“We try to bring those things together by having a small team of 60 investors all in one office here in Melbourne, Australia.”

“Fortuitously, and through some good decisions made by the people who were here before me, we were sitting with about 80% in cash when layman's went broke.”

“When we aggregated up All of the maybe 20 or so mandates we had across that portfolio, by and large, they canceled each other out at the whole portfolio level, and I would have expected we would end up with something like beta less fees. Now, actually, as I sa…”

“Our portfolio has no large buyout at all, because we think that, well, that makes the capacity so much harder, by the way, but we think that large buyout is really just levered equities, typically. And if there's skill added on top, and there might be, then mo…”

“Well, if you include all the inflows over a year or so, it was about sixty billion Australian dollars, of which about fifty billion was in cash, and about ten billion was in Telstra shares that were still in escrow, and were not allowed to be sold for two year…”

“We don't try to re underwrite the deal. We've already underwritten this manager. We've already backed them and we trust them. So our due diligence process will be focused on, is it in their skill set? Firstly, secondly, Is there alignment with the manager? Are…”

“Today the equity book is maybe forty-five billion dollars, and we're just not going to find enough skill out there in the world to invest forty-five billion dollars”

“And so that's why you see us sitting with sort of a bit over 15% in cash.”

“We actually don't manage any assets internally. So we use managers for all of our implementation, and we've probably got about a 120 or so managers on the books at the moment, and would like it not to grow too much more than that, just so that we have the band…”

“We hold almost no physical bonds. We don't have any concept of liability matching. We've only got a return target, and bonds aren't paying all that well at the moment, so there doesn't seem to be a Strong reason to hold them, but we do have some rates exposure…”

“Firstly, our research showed that unlike almost any other asset class, the strongly performing managers tend to be persistent.”

“Mainly our alpha program has now migrated to long short market neutral hedge funds, because we can pick managers with pure skill, and it's very evident if they have it or not very quickly. We're only paying for the alpha, but secondly, they have very concentra…”

“So we have a couple of hedge fund strategies that really are sort of volatility traders or tail protection type mandates. And if we had diversified hedge fund portfolio, and if the person running that or the team running that were incentivized just based on th…”

“I think the data we saw at the time was something like 80% of venture Managers don't return capital and only six or seven percent return enough capital to justify their existence.”

“The equity exposure overall is about 30% of the fund, and that's roughly about half developed market equities and a quarter h of emerging market in Australian Equities.”

“For example, we're doing aged care development in the US at the moment because the demographics are such that there's just a definite need for more facilities in that space, or infill housing in places where, because of the impact of the financial crisis, peop…”

“It was probably about 15 to 20% of the portfolio into credit over about three months. So it was quite a big decision, and clearly that decision paid off very well. Those initial investments returned above 20%.”

“And that portfolio has delivered, you know, really strong over 20% net returns over 10 years now, which is very satisfying considering what's been happening in the world.”

“One is just people who assume the future will be like the past, and I don't think that's a valid assumption. You know, there's a whole lot of things over the last 50 to 80 years, a huge leveraging cycle, a huge demographic boom post-war that have meant that ce…”

“I think they're great at imbuing culture through their organization, and so I started to investigate And they actually have a thing called the Disney University, and they do this culture induction on the first day, and I've been fortunate enough to meet with t…”

“We think commodities are one of the few things that have worked through stagflationary periods and inflationary periods, and we see no reason to think the future will be different, but you've got an added tailwind now that in the decarbonized economy, a lot of…”

“Certain types of real assets, particularly infrastructure assets, that can pass through inflation look quite attractive, but not, for example, regulated utilities, which you might in theory say should be, because there needs to be a social contract. If you're …”

“But if you look over the last three years, actually diversification has been significantly negative because obviously bonds and equities have been correlated in a bad way, but alpha has been really, really strong.”

“And we just couldn't buy it off the shelf, what we wanted. So our technology team, I think, quintupled over the period of four or five years.”

“We've spent more than a half a dozen years now building a system that can look into the portfolio, look through the private funds to understand the underlying assets that we can ascribe our own information onto any assets that we own in terms of what currency …”

“In 2020 we put gold into the portfolio for the first time because we saw that more populist governments would be more likely to print money or otherwise debase their currencies because that's what governments always do when they're in those sort of situations,…”

“And so really, in saying the death of traditional portfolio construction, and my team made me put a question mark on the end of the title, because we're really calling for a debate, but I guess I personally think it is. What we're really saying is there might …”

“Fortunately or otherwise, when you're an asset owner, most people you speak to either work for you, and so it's always hard to know if they're really telling you what they think, or want a mandate off you. And so usually they agree with you wholeheartedly. I'm…”

“Credit actually looks pretty attractive because it has repriced.”

“We don't think set and forget trophy assets are that exciting, because there's no reason to think that you'll just get rewarded for having capital, and so you need to have strategies that actually create something of worth that people want to pay for”

“We manage about two hundred and sixty five billion Aussie across seven funds. The future fund, which is the higher risk fund, is a bit over 200, and we've changed half of it in the last three years.”

“We don't have members or clients. We don't have to do marketing. We're not regulated.”

“So the next thing we did was a wiki survey across the whole organization, as in from the receptionist up, and we said, what do you think's changing in the world? What's important? We came up with a bit over 70 ideas, and we tried to group them, and ultimately …”

“People who are, say, under 45 today, millennial and Gen Z, really have a very different lived experience, partly because of how old they were when the financial crisis happened, and what sort of jobs they got, what that felt like for them, whether they could a…”

“There's many, many reasons why we think inflation will be sustained. It doesn't mean it will stay double digits or high single digits. It will come back down, then it will go up again, then it will come back down, then it will go up again.”

“When we look at the world going forward, we see more inflation, more volatility, probably wars, at least in localized places more frequently, deglobalization, more populist governments that will direct capital, all those things detract from economic growth, al…”

“We don't just invest the Future Fund, which helps strengthen the Commonwealth Government's balance sheet and help to support the economy through COVID, but we also manage the Medical Research Future Fund that funds about a third of medical research in Australi…”

“So when COVID happened and government started to stimulate, we sort of got really interested in whether the world was changing, and I felt like we had to reposition not just the portfolio, but the mindset of the organisation around the world being different no…”

“Right now, real estate credit, for example, looks pretty interesting. There's a shortage of capital, and so our real estate teams and our credit teams are working together on that.”

“When we break down the returns over the life of the fund, 18 years now, we've added about two and a half percent per annum, which we think is pretty good, and it's actually split, interestingly, only about a half a percent to diversification in the traditional…”

“I don't use the word diversification because we don't assume asset classes behave differently in a particular way. We try to look through that in a more granular way to say, well, these subsets, let's say, of real estate in these geographies will behave this w…”

“We have a board appointed by government, but the board are all industry experts. They're not a lay board. They can engage in quite a sophisticated way, and they've always been aligned and supportive, but they've always been close, and by that I mean we have mo…”

“And David Neal, when he was hired as CIO and the person who was in the head of strategy role at the time, Tony Day, came on board before I joined. And the very first thing they did was look at markets and say, we're not sure what's going on, but we think the e…”

“Mainly our alpha program has now migrated to long short market neutral hedge funds, because we can pick Managers with pure skill, and it's very evident if they have it or not very quickly.”

“We think about risk in terms of the cumulative drawdown over a three year rolling period, because we think as a public fund, we've got a responsibility to the public and to the taxpayer, and the tolerance for bigger drawdowns over longer timeframes could be te…”

“Today the equity book is maybe forty-five billion dollars, and we're just not going to find enough skill out there in the world to invest forty-five billion dollars”

“We've worked very hard to slowly build the portfolio to the point where today it's about a bit over two billion dollars of exposure, which is meaningful to some extent at the fund level, but more importantly, it's also very diversifying from the rest of the fu…”

“It was probably about 15 to 20% of the portfolio into credit over about three months. So it was quite a big decision, and clearly that decision paid off very well. Those initial investments returned above 20%.”

“We do have a benchmark from the government of inflation plus four to five percent over the long term that they've given us.”

“When we aggregated up all of the maybe 20 or so mandates we had across that portfolio, by and large they cancelled each other out at the whole portfolio level, and I would have expected we would end up with something like beta less fees. Now, actually, as I sa…”

“Very wisely made the decision that it was better to build the back office and the custody system and the legal approach first before you start hiring investment people, because, believe it or not, investment people want to start investing straight away.”

“And so that's why you see us sitting with sort of a bit over 15% in cash, and why we manage our illiquid asset pool carefully, because while you would hope you get an illiquidity premium from those assets, it also means your portfolio isn't as flexible as it m…”

“We actually don't manage any assets internally, so we use managers for all of our implementation, and we've probably got about a 120 or so managers on the books at the moment, and would like it not to grow too much more than that, just so that we have the band…”

“And we've done about 30 or so of them, as I said, and that portfolio has delivered You know, really strong over 20% net returns over 10 years now, which is very satisfying considering what's been happening in the world.”

“Those large hedge fund, sort of multi-strategy hedge funds, Many of them have delivered significant beta, whether it's equity beta or credit beta, and that is not something we want to pay for.”

“They're mostly actually sort of fund to fund separate account type mandates because we don't have the bandwidth in our team to track 30 or 40 underlying managers.”

“There's a whole lot of things over the last 50 to 80 years, a huge leveraging cycle, a huge demographic boom post-war, that have meant that certain things behaved the way they did, that I just don't think are likely to continue. So I think we have to go back t…”

“So we've transitioned to a model now for some of our committees, and it's in trial where we canvas views the day before the meeting. Whether people are inclined to vote for or against something, and why, and then the chair of the meeting gets that information.”

“The equity exposure overall is about 30% of the fund. And that's roughly about half developed market equities and a quarter each of emerging market in Australian equities.”

“We try to bring those things together by having a small team of 60 investors all in one office here in Melbourne, Australia. And we can all sit in a room and debate things frequently, and we do.”

“So we have a couple of hedge fund strategies that really are sort of volatility traders or tail protection type mandates. And if we had diversified hedge fund portfolio, and if the person running that or the team running that were incentivized just based on th…”

“So we've been playing them A little bit in the equity market we're working on some further strategies there, but significantly in our private equity program, where we have quite a bit of onshore Chinese exposure, really playing those themes.”

“Some of our local peers here in superannuation who have to compete for members have decided to go down a road of setting a fee budget for the whole fund. And then reporting those fees as a competitive advantage in their marketing. And we think that risks cutti…”

“We're doing aged care development in the US at the moment because the demographics are such that there's just a definite need for more facilities in that space, or infill housing in places where, because of the impact of the financial crisis, people stayed at …”

“There was an opportunity in Australia to buy some domestic airports from a listed company, and we wanted to use a manager, but when we started talking to the market, we found that they weren't aligned sufficiently... So we actually went out, surprised the mark…”

“Firstly, our research showed that unlike almost any other asset class, the strongly performing managers tend to be persistent. And I think that's probably due to the fact that the entrepreneurs are attracted to the people who backed the last successful deals a…”

“And so, we sort of think about volatility, but also Sharpe ratio, and it's a hard thing to measure, and there's all sorts of debates you could have about it, but in terms of our 10 year Sharpe ratio, it's about 1.3, which we think for a fund like ours is, is p…”

“Most funds, I would say, they're quite backward looking in their portfolio construction. What I mean by that is they take their sort of CAPM theory and their main variance optimization, and they look at historic data, and they then optimize the portfolio using…”

“We hold almost no physical bonds. We don't have any concept of liability matching. We've only got a return target, and bonds aren't paying all that well at the moment, so there doesn't seem to be a strong reason to hold them, but we do have some rates exposure…”

“And rather than buying the vanilla strategy, we typically would design a strategy that suits us. And then if they have one that we can buy off the shelf, that's great. And if not, we can talk to them about building a specific strategy for us.”

“Fortuitously, and through some good decisions made by the people who were here before me, we were sitting with about 80% in cash when layman's went broke.”

“Well, if you include all the inflows over a year or so, it was about sixty billion Australian dollars, of which about fifty billion was in cash, and about ten billion was in Telstra shares that were still in escrow, and were not allowed to be sold for two year…”

“But the quantitative performance measure, and the more senior you are, the more important that is, is solely based on the rolling three year whole of fund performance in an absolute sense.”

“Private equity is probably about 12% of the portfolio at the moment, and about half of that is venture and growth equity.”

“The Future Fund has actually been one of the beneficiaries of the financial crisis because it had a low risk portfolio going into the crisis. So it had a lot of cash to invest when assets were very cheap.”

“In the case of New Zealand Super, Turtle Portfolio Approach, they have a reference portfolio. Future Fund, Turtle Portfolio Approach, doesn't have a reference portfolio.”